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environmental law society V7, N2 April 1983 assets, Manville achieved a net income in the third quarter of 1982 ASBESTOS and of S25 million, after filing for ban- kruptcy earlier that year. Soon after filing for bankruptcy, the Manville Corporation launched an ad campaign proclaiming "Manvill's BANKRU PTCY new world is full of promise." Under bankruptcy procedure, the Federal Bankruptcy Court is placed in control of all claims and a troublesome suits against the debtor, no matter where a claim originates. Presently, the 1978 Bankruptcy Reform Act is being reconsidered chemistry by Congress due to the U.S. Supreme Court's decision that the Act delegates an unconstitutional amount of power to federal ban- kruptcy judges. (Northern Pipeline. 50 U.S.LW. 4892 (1982).) Asbes- tos claimant's are an unsecured On August 26, 1982, the Manville Corporation filed for bankruptcy under Manville files under the class of-creditors within the ban- Chapter II of the Bankruptcy Code. The corporation was not insolvent (it kruptcy priority system and are actually reported over $60 million in profits in 1981), but was faced with Bankruptcy Act represented by a committee. thousands of present and potential lawsuits asking compensation for asbestos- Manville's reorganization plan will related diseases. Manville determined that the total cost of these future According to a recent study be required to provide for asbestos lawsuits would be about $1.2 billion. Two other major asbestos producers, which Manville commissioned, claimants as well as all other credi- UNR and Amatex, have also filed under the Bankruptcy Act in response to an there will be 32,000 lawsuits filed tors. For example, companies overwhelming volume of asbestos litigation. against the Corporation during the which supply Manville with pro- It is a difficult problem to set up an equitable program of compensation next 20 years, resulting in over ducts who have outstanding for injured individuals where one of the principally responsible corporations $1.2 billion in future liabilities for unsecured claims now have the predicts that its assets will not cover its potential liabilities. From a more criti- the company. This future liability same creditor status as asbestos cal perspective, the problem is: should a corporation with over S2 billion in is no doubt speculative and perhaps claimants. If Manville were to assets and over $1 billion in net worth, including 1981 profits of over $60 mil- inflated. The study's estimates liquidate its assets instead of reor- lion, be able to use bankruptcy to delay and possibly reduce its obligation to pay were based on an average cost per ganizing them, most if not all of damages to asbestos plaintiffs? case of $40,000, while many cases the prsent asbestos claims would in 1982 have cost Manville only be paid. But Manville contends I Background : S16,000. In addition, the total cost that no money would ever reach The Manville Corporation, formerly the Johns-Manville Corporation, is of the suits over the next 30 years future claimants unable to sue now. the largest producer of asbestos in the world. Asbestos is a mineral fiber used has not been reduced to a present This is why alternative legislative widely in industrial and construction projects because of its durability, its ability value figure. At a discount rate of solutions, to be discussed later in to insulate, and its resistance to fire. 8%, for example, Manville's esti- this article, are important con- mate of $1.2 billion in liabilities siderations when thinking about Asbestos fibers, which can be easily inhaled, m:ere first recognized as a over the next 30 years has a compensation for all asbestos vic- cause of lung disease in 1927. Nevertheless, its use continued through the present value of about S500 mil- 1970's, partly because of its beneficial qualities and partly due to an alleged tims. The Chapter 11 filing may lion. From an economic stand- give certain advantages to these cover-up within the industry. Evidence has been introduced in cases for dam- point, this is the more relevant future claimants. ages against Manville that the corporation knew of the dangers of asbestos 30- figure, but Manville's estimate was Manville's petition for reor- 40 years ago, but that it did not publicize the results or warn employees. Man- ville still disclaims having such knowledge. reached by multiplying the total ganization may permit consolidation number of estimated suits by a flat of the thousands of asbestos claims expected cost per suit. The esti- pending in different states. Conso- Three of the predominant 500 new lawsuits being filed every mate of total future liability does lidation of the claims should make asbestos-caused diseases are asbes- month. Manville's estimated liabil- not account a for a likely decrease it less costly for Manville to defend tosis, mesothelioma, and lung ity from suits already filed is $660 in Manville's defense costs due to itself, ostensibly resulting in more cancer, all of which have a long million. Although Manville's aver- increased efficiency through repeti- latency period. Between 1940 and age settlement cost in these suits is money for all creditors. By halting tion, or through the possible conso- the present asbestos suits, money 1979, more than 27 million Ameri- $40,000, it has in some cases been lidation of suits by the bankruptcy can be saved and a plan devised so cans were exposed to the asbestos, found liable for punitive damages courts. Yet Manville used this that all asbestos victims, present many as a result of working in of as much as $600,000. study in predicting future financial naval shipyards during World War In Johns-Mansville Corpora and future, will be compensated to insolvency, despite its present S1 some degree. It is also true, how- II, where asbestos was widely used tion v. Superior Court , 27 Cal.3d billion in net worth. It should be in construction. According to a ever, that numerous suits approach- 465 (1980), the California Supreme noted, however, that the estimated 1964 study by Dr. Irving Selikoff of Court held that although an ing settlement were suddenly future liability was not adjusted for stopped by the filing of bankruptcy. Mt. Sinai Hospital in New York, employee's compensatory damages inflation. 235,000 deaths will occur between for asbestos related injuries are In one well publicized case, a dying 1982 and 2027 as a result of asbes- As a result of this prediction man was deprived of his compensa- usually limited by Worker's of insolvency, Manville filed for tion checks which had already been tos exposure. Every year, between Compensation law, Manville was 8,500 and 10,000 cancer deaths are protection from creditors and promised him by Manville. liable for punitive damages because claimants under Chapter 11 of the related to asbestos, according to the of the corporation's knowledge and study. Bankruptcy Reform Act (11 U.S.C. concealment of the dangers of § 301). While Chapter 11 usually To date, claimants have filed asbestos. concerns "reorganization' of a 16,500 asbestos-related lawsuits faltering and insolvent debtor's against Manville, with an estimated (Ste ASBESTOS, page 2) .Environmental LawSociety NNRFTOG NONPROFIT ORG. School Law of ersity ofCalifonia UnhU U.S. POSTAGE Califoma 95616 Davis, PAID Davis, Calif. Permit No.3 2 +niAHK~nM NV_ cases involving almost 13,000 indi- Asbestos (continued from front page) vidual claims. The government has which prevent recovery for diseases with long latency periods such as argued that there was adequate sur- those caused by asbestos. Further- veillance of the shipyards and that more, payments under these pro- Many of the attorneys health standards were upheld. grams are often inadequate because representing plaintiffs in asbestos Officials also claim that the govern- compensation is based on 1940 litigation contend that Manville in ment is already helping to compen- wage scales. Hart's bill calls for a fact filed for reorganization to sate asbestos victims through Social plan of reform to correct these defraud plaintiffs. They claim that Security Disability, Medicare, con- inadequacies. now that bankruptcy has been filed, tributions to state worker compen- present asbestos plaintiffs will sation funds, and through other receive less from Manville than programs such as veterans benefits S Conclusions [ they would have through individual and benefits given under the litigation. The committee of asbes- Federal Employment Compensation tos claimants has filed a motion in Act. Neither a final compensation our bankruptcy court arguing that plan nor a Chapter 11 reorganiza- Manville's petition was filed in "bad faith", and should be dismissed. As Legislativ teatives tion plan for the Manville Corpora- tion has been agreed upon at this MONEYTREE of this writing, this motion has not date. The asbestos industry wants is part of an extinct been ruled upon. If this motion is government participation in a plan One piece of legislation intro- to compensate asbestos victims; the species...in spite of our unsuccessful, Manville can be expected to propose a long-term duced to aid asbestos victims does government opposes it. Unions environmental efforts...so plan of restructuring for the cor- not require government contribu- oppose any limitations on liability we turn to you, our poration and its debt. How present tions to a general fund. Represen- suits which a general fund or a readers, with this plea for and future asbestos claims will be tative George Miller (D-Calif.) revised worker compensation pro- support... accommodated in this plan is unc- sponsored a bill (HR 5735) in 1982 gram might create. Victims oppose ertain. Furthermore, it is unclear that would require only asbestos limitations on compensatory dam- whether an economically healthy manufacturers and suppliers to set ages, and it is unclear what causes corporation like Manville needs to up a compensation fund. Accord- of action a dead victim's surviving PLEASE SUBSCRIBE restructure at all. Manville (and ing to Miller, requiring the govern- family members might have under TO ENVIRONS AND the entire asbestos industry) along ment to contribute to the compen- the different alternatives in seeking sation fund "would establish a ASSIST OUR with Congress, has recognized the compensation. Furthermore, none need to consider alternative solu- dangerous precedent which could of the proposed bills has been rein- CONTINUING EFFORT tions to the problem of equitably open the door of the Treasury to troduced into the new Congress; a FOR SUSTENANCE compensating asbestos victims. every manufacturer of a hazardous new push will be needed to con- product or substance which finds tinue discussion for a legislative itself confronted with admittedly solution to emerge. Please fill out the form below Industry Solutions I large liabilities ... which are of its Beyond the immediate dispute and mail to: to Asbestos Litigation own making." Miller claims the involving Manville lies a broader taxpayers are already spending over Environmental Law Society policy question of how to avoid S3 billion a year to compensate vic- UC Davis School of Law similar situations in the future. Manville would like to see tims through other government Davis, California 95616 The alternatives offered will allow established a "no-fault" system of programs, and he believes govern- claimants to escape the burden of compensation in which industry ment contributions to an asbestos- long and expensive individual litiga- members and the federal govern- compensation fund would be a tion in seeking compensation. Indi- Please make checks payable to: ment would contribute to a general bailout for the asbestos industry. vidual litigation of asbestos cases ELS/Environs compensation fund. This fund An alternative piece of legisla- has had the beneficial effect of would be used to pay claimants tion, S. 1643 sponsored by Senator bringing to light the information directly, instead of each claim being Gary Hart (D-Colo.), does specify concerning Manville's early government participation. This bill NAME: litigated separately as Manville has knowledge of asbestos' dangers and done in the past. The fund would calls for establishing a commission in some cases has resulted in ADDRESS: provide the asbestos industry with a of government, health, labor, and Manville being held accountable collective and finite compensation industry representatives who would accordingly. program through which asbestos develop criteria for state worker As more and more toxic sub- damage claims could be paid. Man- compensation boards. The criteria stances enter the workplace and ville president John A. McKinley would be used to determine pay- environment, there is an increasing stated, "[The adequacy of asbestos ments to victims by assessing each danger that the industries involved compensation] is not a financial participant's responsibility through will seek refuge in bankruptcy to failure. It is a failure of our court a complicated arbitrator's formula. delay and possibly avoid compen- AMOUNT ENCLOSED: and legislative system to compen- Since each party would be required sating their victims. The Manville o S 5.00 -Bread & Water sate victims of an unexpected occu- to pay its respective share, Hart Corporation's use of bankruptcy o S10.00-Soup & Sandwiches pational health catastrophe." This claims his legislation is not a towards this end brings into ques- r S15.00 -Three mealsa day fund would compensate most, if bailout bill. The key issue, says tion the proper use and purpose of Hart, "[ils, and always has been, o $25.00 - Gourmet Delight not all, of the victims. Prior to the bankruptcy law. Changes in o S....._ - Friend of Environs bankruptcy, Manville won about not what is good for the asbestos bankruptcy, tort, and workman's (any amount appreciated) half of the suits against it, usually industry . . . but what is necessary compensation laws may be required because the claimants could not to insure that workers disabled to make certain that victims receive Any subscription donation prove a causal link between asbes- from asbestos-related diseases are prompt and fair compensation, given wilt insure your receipt of tos and their illness. With the fairly compensated by the parties without permitting wrongdoers to all issues of Environs published fund, this would not happen. How- responsible." According to Hart, escape their responsibility through this year. ever, the compensation from the this plan would force Manville to bankruptcy laws or otherwise. Is there some onelorganization fund might not equal what a jury take responsibility for the alleged that might benefit from award would have been after indivi- cover-up of the asbestos problem receiving Environs? Please send dual litigation. Manville views this 30-40 years ago, and would provide us their name/address too. as a desirable way to limit its liabil- for federal contributions because of ity. the federal government's status as Norine Marks, NAME The federal government an employer controlling work pro- Adam Rosen claims there is no basis for requir- jects where asbestos was used ADDRESS: ing government participation in extensively. such a compensation program since One of the main policy rea- its liability for workers' injuries has sons behind Hart's bill is what he not been established. Because of perceives as the inadequacy of state the many victims who were worker compensation programs and exposed in the military shipyards the need for their reform. Those during World War II, the govern- programs tend to contain artificial ment has been sued as a co- barriers to compensation such as defendant in about 1,200 asbestos impractical statutes of limitations (nhKVA m i I I I I I I I I Io hLS n I m -- L 3 I The Implementation of the Asset Management Program Some administration officials have expressed concern that the executive branch lacks the capacity to implement the President's pro- gram. A recent Congressional Budget Office (CBO) study esti- mates that the administration will fall $4.75 billion short of its 1983- 85 goal for land sales revenues of $9.25 billion. The CBO predicts that in 1983 alone, the administra- On February 25, 1982, BLM lands could be sold for of certain federal lands to be used tion will fall S900 million short of President Reagan signed Executive approximately S2.5 billion. Overall, for state and federal aquisition of its $1.25 goal. The CBO doubts Order 12348 to create the Federal more than 307 parcels of what is land for parks, recreation areas, that the General Services Adminis- Asset Management Program. The deemed "unneeded federal pro- wildlife refuges or other public tration (GSA), which is responsible program's purpose is to identify perty", totalling over 60,000 acres, uses. Thus, existing laws may for processing all federal land sales, federally owned land that is "excess are included in a list recently pub- prevent the funds raised from land will be able to handle large or surplus" to the needs of execu- lished by PRB Chairman Harper. sales from going into the general increases in its workload. In fiscal tive agencies so that this property Land offered for sale includes 17 fund to reduce budget deficits. 1982 the GSA's 123 member staff can be put to its "most beneficial acres of Waikiki beach front owned Congress' response to the coordinated the sale of almost S135 use." One such use is to sell these by the U.S. Army and valued at Asset Management Program has million of federal property. The properties to raise revenue. The $221 million; the now vacant five- been mixed. Senator Charles H. administration plans a nine-fold Reagan administration estimates story New York Assay Office on Percy and Representative Larry increase in land sales during fiscal that 5% of the 744 million acres of Wall Street estimated to be worth Winn, Jr., have introduced bills 1983, but has not even doubled the federally owned land, approxi- $8.3 million; and the 33 acre Point (S.R. 231, H.R. 265) in support of GSA's real estate staff. Further- mately 35 million acres, could be Sur Light Station in Big Sur, Cali- the program. These resolutions more, in the past it has taken the sold during the next five years to &~2ZijZj~> raise over $18.3 billion. The Property Review Board and Terms of Sale Executive Order 12348 esta- blished a Property Review Board (PRB) chaired by Edwin L. Harper, Assistant to the President for Policy Development. Other Board members include presidential aides Edwin Meese Ill and James A. Baker Ill, and National Security Advisor William P. Clark. The Order requires the head of each executive agency to inventory all .property holdings which . . . are not utilized, are underutilized, or are not being put to good use." Each inventory is to be sent to the fornia, for which no value has been urge the President to submit legis- GSA an average of 18 months to PRB, which will help agencies sell determined. lation to stream-line current public sell a parcel of surplus property. land laws. The bills also specify The Administration plans to quin- the identified holdings. Properties would be offered first to other that the proceeds from land sales tuple the GSA's workload while federal agencies, then to state and Federal Law and the Disposition go only to reduce the national debt. cutting its processing time by a local governments, and finally to of Federal Lands Congress has not acted on these third. Even if this were possible, it private entities and citizens. State proposals because the administra- would seem difficult at best to and local governments must pay tion is expected to submit its own maintain the GSA's program qual- Executive Order 12348 market value for these lands unless emphasizes that the PRB's role in measure soon. ity standards. they can demonstrate that a lower the Asset Management Program is Many Washington observers selling price is in the public only to resolve conflicts over the doubt that Congress will give the [ The President's Supporters interest. Private purchasers must alternative uses to which the lands President the support needed to also pay market value. could be put in accordance with the make asset management a success. federal law. However, existing land Many Congressional representatives Despite widespread doubts management policies and laws clash fear that lands will simply be sold Land for Sale that the Asset Management Pro- sharply with the President's pro- to the highest bidder, with little gram can significantly ease budget- gram. On February 9, 1982, more consideration for the public ing strains, the program does have To date, executive agencies than two weeks before the interest. Governors of many the support of many high-level have identified numerous parcels of President signed Executive Order western states fear that land sales officials. Secretary of the Interior surplus land. On May 18, 1982, 12348, the Cabinet Council on could result in new absentee land- James Watt recently stated that he the U.S. Forest Service announced Economic Affairs issued a report lords, perhaps foreign ones. could think of no "better way to that 54 tracts of surplus land total- warning the President that *current Even if the administration raise some of the revenues so badly ing 42,730 acres would be offered statutes and regulations . . . make succeeds in getting land sale needed than by selling some of the for sale. These tracts include the commercial sales of federal lands proceeds funneled into the land and buildings no longer San Gabrial Canyon in Azusa, Cali- difficult if not practically impossi- Treasury, the Federal Land Policy needed." Nevada Senator and fornia, and the White Deer ble." President Reagan wants to Management Act (FLPMA) of presidential confident Paul Laxalt Administration Site in Dunlap, Cal- sell lands to help balance the 1976 significantly restricts the sale would like to see the BLM's 155 ifornia. Most of the identified federal budget, but the Reclamation of federal lands. FLPMA requires million acres of grazing land sold to surplus lands are administered by Act of 1902 requires proceeds from Congressional approval, for those who use these lands, i.e. large the Bureau of Land Management the sale of any western lands to go instance, before any parcel larger ranchers. Laxalt argues that "some (BLM) and are located in the six- to the reclamation fund for use in than 2500 acres is sold. FLPMA form of privatization would benefit teen western states. On June 17, building irrigation projects. The does not, however, totally prevent all of us." the Interior Department released its Land and Water Conservation Act officials from selling excess or estimate that 4.3 million acres of of 1964 directs funds from the sale surplus lands. (See PUBLIC LANDS, pae4) 4Nb small people." It does in fact seem likely Selling the that if large amounts of land were suddenly to be put up for sale, the Public Lands ROWER IN price received for the parcels would be far below their true values. (continued from page 3) Some see the land sales as more of a philosophical than a budgetary issue. Economist Steven Conclusions X1 During the middle of this DEVELOPMENT H. Hanke of John Hopkins Univer- sity believes that *private property is always more productive than century, American policy makers reversed the country's policy of public land disposal after realizing CALIFORNIA public property." Hanke disagrees that tremendous abuses of that pol- In the last Issue of Environs , significant incentives for private with supporters of the 'Sagebrush icy were taking place, and that Jim Laughlin described the potential investors to develop small power Rebellion', who advocate increased future generations' access to many for wind power development in Cali- facilities. Before PURPA was efficiency through the transfer of public amenities and resources was fornia. Wind power, ind other small enacted, most utilities paid small federal lands to state governments. being mortgaged away. Fifty years power technologies, are increasingly power producers meager sums, it Hanke argues that the only way to later, the Reagan Administration's attractive alternatives to central sta- anything at all, for power supplies. improve the productivity and tion power production from the stand- Furthermore, potential developers Asset Management Program might efficiency of public lands is to point of investors and electricity seem like a reasonable method to users. blamed the prospect of being regu- privatize them. Curtis M. Miller, help balance the budget. But since lated as public utilities as a major agricultural consultant to the Cali- the program significantly changes In order to optimize small power cause of the slow development of fornia Agriculture and Water development, state and federal policy federal land management policy, it commercial alternative energy sys- Resource Committee, complains makers have created rules governing raises important questions. the basic price and other contract pro- tems. To correct this roadblock. that the lack of an incentive on the the provisions of PURPA exempt visions to be offered by regulated utili- part of federal land managers to ties to independent small power pro- certain "qualifying facilities" (QFs) turn a profit causes federal agencies ducers. California regulators have from utility status for the purpose to 'engage in some of the most adopted various rules which seek to of state and federal regulation. It wasteful and destructive practices ensure the existence of a market for requires regulated utilities to pur- imaginable." electricity produced by alternative chase QF power and to pay a price energy technologies. In large part, up to the utilities' 'avoided costs." the ability of developers to finance that is, the cost which the utility small power projects will determine would otherwise incur to produce Opponents of the the extent of such development in the President's Program or acquire that power. state. This article presents a sum- mary of public policy affecting the Notwithstanding such incen- financing opportunities of potential tives, the difficulties of acquiring Many doubt the President's developers. adequate financing impede private program can work even if legal and The author, Kim Malcolm, is an investment in small power facilities. budgetary hurdles are overcome. analyst for the California Public Util- A weak national economy and the Nevada Senator Dean A. Rhoades ities Commission (CPUC), and holds financial risks associated with new disagrees with Senator Laxalt and the position of Advisor to CPUC Com- energy technologies create an missioner Priscilla Grew. Ms. Mal- unfavorable climate for otherwise feels that ranchers don't want to colm has a Master's degree from the buy land on which they would have economically viable investments. Congress must decide whether or Graduate School of Public Policy of to pay taxes. He says they would not to initiate a policy of selling the University of California at Berke- Under PURPA, federal law rather secure long-term grazing public lands to reduce the national ley. The views expressed in this arti- permits state authorities to imple- rights. Lonnie Williamson, Secre- debt. The Administration may cle are those of the author and not ment policies which would help tary of the Wilderness Institute in have to ignore its budget cutting necessarily those of the CPUC or its developers acquire financing. In Washington, doubts that ranchers stance by increasing the GSA's staff. California, the Public Utilities can afford to purchase federal budget to insure that that office, Commission (PUC) is responsible lands. She says, "there are not two which must process land sales, is for establishing such policies by its dozen livestock operations in the adequately staffed. Western state implementation of contracting prin- whole country that can afford to and local governments seem unwil- ciples which apply to the state's buy the land they graze on." ling to support a program which utilities. This article discusses QF Historically, private manage- transfers federal property from pub- financing and how the PUC's ment of what had been public lic to private ownership. Real adopted policies may affect small domain has often resulted in estate purchasers may not respond power development in the state. despoilment rather than increased enthusiastically to those lands the productivity. Such waste prompted federal government offers for sale. Congress to pass the Taylor Graz- The public must decide which lands Financing Small Power ing Act of 1934, the Wilderness to sell and when to sell them; Development Act of 1964, and the Federal Land prices will most certainly be lower Policy and Management Act of in today's real estate market than 1976. Federal land management they would be in a strong market. The value of small power policy has gradually evolved from a These issues need to be resolved technologies has become more policy of disposal to one of conser- before any program of asset obvious as the cost of conventional vation and preservation. Privatiza- management should be allowed to power generation has increased. tion ignores past policy and returns proceed. The California Energy Commission to an older system of management. reports that by 1985, alternative These considerations aside, technologies will have lower costs many feel that 'asset management' of supply than conventional options. ( See California Energy is not the proper way to reduce budget deficits. Nevada Represen- Commission, Service Corporations: tative James D. Santini says privati- Allen Ginsborg Opportunities for California Utili- zation misses the boat. He argues ties, November 1980). This long- that the proceeds from federal land term advantage, however, may not sales should be put in a trust fund be enough to convince lenders to to meet the environmental and back small power projects. recreational needs of the future. A High interest rates discourage recent Los Angeles Times editorial new investments. Small power pro- characterized the Asset Manage- duction is especially expensive ment Program as "a fire sale that because lenders often require large will . . . burn Americans for gen- equity contributions to cover the erations to come." The Wilderness Introduction high initial costs associated with Society sees the program as nothing The Public Utilities Regula- small power technologies. Small more than "an outright piracy of tory Policies Act (16 U.S.C. § power developers, however, fre- 82 lands that belong to the American 4a-3 et seq. ) of 1978 created (See SMALL POWER, page5j f hY, K -No I ~TiK, development. Shortly before plies which are based on Small Power PURPA was enacted at the federal projected avoided energy costs at the time the obli- The Gospel According to OIR 2 (-otnLed from c pa 4) level, the PUC adopted similar poli- cies to encourage development at gation is incurred. These In establishing contract terms the state level. In a 1978 decision, energy prices are based on for QFs, regulators have to balance quently have little or no indepen- forecasts and are many competing interests and dent financial strength. the Commission ordered the state's utilities to pay small power produc- guaranteed for up to five evaluate numerous alternatives ers avoided costs for purchased years. using a number of guidelines. The In addition, small power tech- goals of the contracting process are power. The decision also discussed nologies such as wind and waste- 3. Firm Capacity Contract. A to: the benefits which occur as a result to-energy are relatively new and are QF providing the utility of the development of alternative thus considered to be high risk ven- with firm capacity may Encourage development power sources such as resource 1. tures. Even technologies that have receive a higher capacity economical small diversification, increased indepen- of been tested and that are considered payment than that offered The dence from foreign fuel sources, power facilities. more reliable, such as cogeneration, under an as-available con- and the shorter lead time required intent of avoided cost may seem risky to investors tract. To qualify, the QFs for the construction of generating pricing policy is to pro- because of regulatory uncertainty. must meet certain power facilities. mote those facilities Lenders will not absorb the risk generation performance which would be viewed as that the avoided cost payments a More recently, the Commis- attractive private invest- QF receives from the utility will sion went a step further and esta- ments under competitive fall below debt service obligations. blished guidelines for the develop- market conditions. The The effect of all these "market ment of a number of standardized newness of alternative failures" is that developers may not contracts which the state's regu- energy technologies, the be able to secure adequate financing lated utilities were then required to regulatory uncertainty, if utilities' avoided cost payments are allowed to vary over the life of offer to QFs. That decision was and other development the Commission's first step towards barriers complicate the the project. implementing the Order Instituting market for small power Unfortunately, avoided costs Rulemaking #2 (OIR 2), .which facilities. Regulation may are certain to fluctuate over a was issued by the PUC in January be required to mitigate project's life since they are based of 1982. these problems. standards. If the QF 2. Establish contract options on the changing costs of a utility's exceeds the utility fuel supplies and of projected addi- OIR 2 established guidelines which do not redistribute industry's performance tions to its capital plant. Numerous for four "standard offer contracts' risk without adequate standards, it will qualify contract terms may be devised, and for policies regarding project- compensation. Policies for higher capacity pay- however, to ease the effect of this specific contracts which are indivi- which provide better ments. condition on financing attractive- dually negotiated between the utili- financing opportunities ness. For example, "levelized" pay- By choosing this option, simultaneously redistri- ties and developers. The provisions ments guarantee a price per of the four standard offer contracts the QF qualifies for a bute the risk of invest- are: levelized capacity payment ment. For example, kilowatt hour of energy delivered for some specified length of time, schedule. Levelized pay- levelized payment with early payments which exceed ments are calculated by schedules result in over- avoided costs being offset by later estimating the total value payments in the early I. Short Term As-Available of the QF's production payments which are below avoided years of a contract which Contract. Facilities pro- over the contract period, cost. In the long run, the sum of viding utilities with "non- are to be made up for in all the payments is equal to the and then spreading this later years. Utilites are firm" power receive full total value based on full total avoided costs or some percen- obviously taking on some avoided energy and capa- avoided costs out over tage of them. Another option is city payments which vary additional risk in this case loan guarantees that secure indebt- that period through aver- because of the possibility by time of delivery. age payments. Under this edness in the event of project Non-firm means the QF is that the QF will stop pro- failure. Alternatively, price "floors" option, capacity payments ducing power before the not bound to deliver are based on the short run insure that the avoided coat pay- initial period of overpay- power at any particular costs of the utility as ments will not slip below a nego- ments is made up for. time of day or season, so defined above. The level- tiated level. Compensation for early the utility cannot rely on ized payment period may risk could take the form it for peak demand extend for up to 30 years. These provisions and others of discounts from full periods. However, if the can encourage QF development avoided costs or some because they reduce the investment QF does provide power other offsetting contract during periods of high 4. Long Term Contract for uncertainties faced by lenders. Energy and Capacity. QFs term. demand the utility must They also, however, may redistri- which enter into long 3. Avoid a situation where pay a higher price than bute financial risk from the project term contracts for firm ratepayers or utilit stock- that paid for power developers to the utilities' stock- capacity may qualify for holders subsidize OF delivered during other holders or ratepayers. This prob- periods. payments based on long development. Over the lem must be taken into account by run avoided costs of term of a contract, total state regulators who have the power Capacity payments are energy and capacity. Util- energy and capacity pay- to require utilities to offer contract based on the utility's ity calculations are to be ments to QFs should not terms which enhance financing short run avoided cost based on the costs of the utilities' exceed opportunities, either through "stan- reflecting the cost of a gas additional power genera- avoided costs. Subsidies dard offers or through a process of turbine plant. A capacity tion projects in their to QFs would distort negotiation between the utility and payment is offered, even resource plans, but the though supplies are non- investment choices and the developer. Standard offers are details of these contracts could place unfair burdens created through a process of firm, because it is have yet to be worked out on ratepayers or stock- rulemaking at the PUC, and must assumed that the aggre- by the utilities. holders in the short term. be offered to QFs by the utilities. gate reliability and value of the small power system The Commission also granted 4. Encourage the utilities to Negotiated contracts deviate from utilities the discretion to submit standard offers, and may be tailored exceeds the sum of indi- use their expertise and vidual units' production. individually negotiated contracts for financial strength to aid to the particular needs of the CPUC review as they are signed, developer. If a QF seeks a nego- Avoided cost payments small power development. are calculated at the time although the Commission did Utilities have engineering, tiated contract, the utility must bar- discourage regular use of this gain in good faith. The following power is received by the managerial and financial utility, and will therefore option. The utility is more assured expertise which are valu- section contains a summary of the of recovering all contract costs contracting policies adopted by the vary over the life of the able assets for developing contract. through its rate base if the Com- an efficient small power PUC. mission has approved the contract. system. Most utilities If the utility chooses not to acquire also have access to rela- 2. As-Available Contract advance approval, it is at risk for tively inexpensive credit. Summary of California Policy contract costs which may be con- with Escalated Energy Regulators can induce the Payment Option This con- strued as unreasonable by the tract provides payments Commission in subsequent rate California policy makers have generally supported small power for non-firm energy sup- proceedings. (Se SMALL POWER. page 6) 6Al Kc, automatically guarantee that the signed a number of negotiated con- Small Power utilities' contract costs would be tracts in 1982 without Commission Hopefully, the prospects for small power project development (continued from page 5) passed through to rates. The suc- approval, thus expediting the pro- will be enhanced as the economy cess of the pre-approval policy that cess. Under such circumstances, a recovers, and as the success of a utilities to put these assets was adopted will depend largely on remaining concern is that utilities few early ventures instills to work with 1) standards the willingness of the utilities to bargain in good faith with QFs. It confidence in the investment com- which tie utilities' regu- negotiate and to accurately and appears that the PUC will be watch- munity. In the meantime, state lated rates of return to fairly assess the technological and ing the utilities for signs of unfair policy makers will need to continue evidence of good faith financial risks of QFs. Ultimately, bargaining, and that it will respond to pursue policies which can lead to efforts to encourage small its success may depend on whether accordingly. The PUC docked optimal small power development, power development; 2) the utilities are willing to sign a Southern California Edison's return which will provide Investors with guarantees that contracted contract before the PUC approves on equity 25 basis points in the confidence that the market does expenses will be passed it. If utilities require Commission December of 1982 because the not yet provide, and which will at through to ratepayers; and approval beforehand, the ensuing PUC concluded that the utility the same time balance their 3) rewards to the utilities long and expensive regulatory pro- lacked vigor in its promotion of interests with those of the state's implemented through the cess may discourage otherwise small power development. energy consumers. rate base or through some attractive projects. On the other hand, avoided other regulatory mechan- In spite of these disappoint- cost calculations for California ism. Generally, some ments, developers are likely to view utilities decreased significantly dur- type of inducement is ing 1982, frustrating small power needed since a utility has developers. The oil glut, Volume 7, Number 2 little incentive to promote correspondingly lower oil and gas the development of a sys- prices, and a good hydro year April 1983 tem which complicates its lowered the utilities' avoided own operations and with energy costs. Erratic world fuel oil ENVIRONS, a non-partisan envi- which it must compete. prices moved Southern California ronmentallawnaturaI resources nws- S. Avoid unnecessary reguLa- Edison to announce that it would letter published by King Hall School t involvement. The not enter into negotiated contract of Law, and edited by the Eni. ronmental Law Society. University more regulators are obligations which include levelized of California, Davis. involved in the contract- payments or floor prices because of Designation of the employer or ing process, the more the difficulty of estimating future other affiliation of the author(s) of expensive and time con- avoided costs. any article is given for purposes of identification of the author(s) only. suming the process During 1982, the PUC contin- The views expressed herein are those becomes for developers. California's policies favorably when ued to investigate methodologies of the authors, and do not necessarily Requiring pre-approval of they are compared to those adopted for calculating avoided costs and reflect position of the University the all negotiated contracts, of California, School of Law, Env- by the regulatory agencies of other the contract terms included in the ronmental Law Society, or of any for example, could add states. No other state has devoted utilities' proposed standard offers. employer or organization with which significantly to the cost of so much attention to the details of More hearings are planned for 1983 an author is affiliated. project development. utility contracts on behalf of to establish the terms of the utili- Submission of Comments, Letters Given this list of policy cri- developers. In fact, many states do ties' long term contracts. The reso- to the Editor. and Articles is en- teria, and given regulators' inex- not require utilities' contracts with the couraged. We reserve right to edit lution of these matters should pro- and or print these materials. perience with small power produc- small power facilities to conform to vide more certainty for developers tion in general, it is not surprising any adopted rules or guidelines. and lenders. that the Public Utilities Many leave it to the utilities to esti- Commission's OIR 2 policies have mate avoided costs rather tqan Editorial Staff Conclusion turned out to be conservative from using the California approach of Editor-in-Chief the standpoint of developers. developing assumptions under LauraKosloff which avoided cost calculations are PURPA and OIR 2 signal a Managing Editors made. Because of the PUC's atten- change in how and by whom energy Jerry Hobrecht tion to these matters, developers will be produced. State and federal Mark Trexler Assessm'ent of PUC Policies policy makers have taken steps to from the Developers' Standpoint are likely to choose California sites Editors over those in other states, when induce the development of an Hugh Barroll they have that choice. energy system which will include Jamie Kerr unregulated production by relatively Clancy Nixon The terms of the standard new technologies. The risks of creating such a system are Production Managers offer contracts have not received The State of the World Lynn Hutcldns rave reviews from developers. Since OIR 2 significant, but appear reasonable compared to conventional alterna- Jim Laughlin Those contracts are unlikely to enhance financing opportunities of tives. Art developers unless their projects use Since the Commission issued Although recently-adopted D. Hanlon well-developed technologies so that the first OIR 2 decision in January policies may give developers new Staff investors can provide lenders with of 1982, the prospects for small incentives, institutional and Elliot Block evidence of past success, unless the power developers appear somewhat economic uncertainty remains. The Donna Bronski projects are capable of producing brighter. The PUC approved a 30 political preferences of state and MarciBurkel highly controllable output, or year negotiated contract between federal administrations could Gerri Carr unless they are backed by other U.S. Windpower and PGandE in threaten guarantees provided by Laurie Davis sources of income or large equity April of 1982. Briefly, the contract current policies, a possibility which Allen Ginsborg contributions. The levelized provides that payments to U.S. will be of foremost concern to Martha Lennihan payment option is available only to Windpower will not fall below a investors. The PUC's pricing poli- Norine Marks projects which have predictably negotiated price per kilowatt hour cies, however, appear secure for the Adam Rosen high performance standards. of energy supplied to PGandE. time being. They were adopted by Fern Shepard Furthermore, it is only the capacity PGandE's ratepayers are compen- Brown Administration appointees to Nancy Simel payments that are levelized, and sated for promising a guaranteed the PUC who favor alternative Sandy Spellisy they represent only a small portion price floor with a discount from power development. Over the next Maureen Summers of total QF income. Escalation, actual avoided costs. Overpay- few years, however, these policies Faculty Adviser although an option available to all ments to U.S. Windpower which could be jeopardized by the legisla- Harrison C. Dunning QFs, is offered over a time period accrue in the "bad" years are repaid tive preferences and political that may be too short to help to PGandE with interest in the appointments of the Deukmejian developers match income streams .good" years, when avoided costs Administration, which has already to debt service obligations. Because are high. Unfortunately, it took promised to reduce funding for the of the shortcomings of the standard five months for PGandE and U.S. development of alternatives to cen- Ar 153. Co[rt t5's,,,el offer contracts, many developers Windpower to obtain regulatory tral system power generation. will opt to negotiate individual con- approval of the contract. The cost of financing small and Design jobcoordination byRobert tracts in order to secure financing. More recently, there are signs power projects is still high, and the Maddock. Publicatiom. Layoutandsome The PUC's policy on nego- that some utilities will not choose level of future avoided costs seems UC typeseting by Repro Graphics. DasiL tiated contracts is also a disappoint- to seek approval by the PUC before increasingly unpredictable because ment to developers, for they had allowing contracts with QFs to take of the volatility of the world energy hoped that the PUC would effect. Southern California Edison market.